Brown urged to raise top tax rate

THE top rate of income tax will rise to 50% under radical plans being studied by Chancellor Gordon Brown.

He is being urged to introduce a 'supertax' for those earning more than £100,000 a year, while giving cash back to the less well-off.

The controversial scheme will inevitably lead to accusations that Labour is returning to its old soakthe-rich habits.

The proposal is being put forward by the Fabian Society, an influential thinktank whose former chief, Michael Jacobs, was recently hired by Mr Brown as a key economic adviser. Details are expected to be unveiled at next month's Labour Party conference.

The Fabians' general secretary, Sunder Katwala, revealed the plan in an exclusive interview with The Mail on Sunday. He said that, for too long, Labour had been afraid to talk about tax for fear of alienating crucial middle-class voters.

Controversially, Mr Katwala called on the party to abandon its 1997 pledge not to increase income tax.

'We need to break the political taboo on tax,' he said. 'It is unhealthy. A government that has been in power this long does not need to be afraid of talking about the issue.

'It would be a big mistake for Labour to repeat the pledge not to raise income tax.' Under the Fabian plans, the extra money raised from the 50% supertax could be used to help middle-income earners.

The society wants to see a large increase in the 40% tax threshold - £31,400 - to free hundreds of thousands of middle-class taxpayers from paying the higher rate.

The Chancellor has failed to raise tax thresholds in line with increased earnings, meaning that 1.5m more people have been drawn into paying the top rate since 1997.

'You could change the tax rates without increasing taxation overall,' said Mr Katwala.

'You could have a new top rate to fund a middle-class tax cut. There could be a 50% rate for those earning more than £100,000. And the current 40% band could come in later.'

Mr Katwala said he also wanted to see benefits not just for middle-income earners but extra tax breaks for the least well-off, too.

If the plan is adopted, it would constitute the biggest programme of redistribution from rich to poor since Labour came to power. Previous Fabian ideas have been listened to with interest in the Treasury.

A proposal by the thinktank to have different taxes earmarked specifically for different purposes led to Mr Brown's announcement in 2002 of a 1p increase in National Insurance to pay for more health spending.

And in 1997 Mr Brown himself argued for a new 50p-in-the-pound rate but was overruled by Tony Blair, who was worried that this might send a negative signal to foreign investors.

However, it is not clear whether Mr Brown is ready for another potentially heated Labour debate on taxation. When Commons leader Peter Hain argued for reform of income tax last summer, he was angrily slapped down by the Chancellor.

Last week, another New Labour think-tank, the Institute for Public Policy Research, provoked a furore with a report arguing that the betteroff should pay more inheritance tax.

Mirroring the Fabian plan, the IPPR said estates worth more than £763,000 should pay death duties at 50%. At present, inheritance tax is charged at a flat rate of 40% on legacies over £263,000.

The flurry of activity from Labour policy-makers comes after a memo sent by Mr Blair to thinktank chiefs before the summer holidays demanding radical ideas for the party's third-term manifesto.